David Hood has been one of the many people noticing the huge uptick in love for risk management of late. And while doing so, he points out something salient about the banking sector.
See, one of the fallouts of the financial crisis has been a return to basic banking practices. Banks, fearing the world of complex securities and swaps that nearly brought the system to collapse, have been running towards “vanilla.” They needed a new influx of capital after finding out just how toxic their balance sheets were and saw checking and other traditional bank products as a safe haven to keep revenue coming in.
I was reminded of this by a recent article in BAI Banking Strategies titled, Online Account Opening Needed To Fuel Growth. The article rightly pointed out that many banks are going back to basics, building revenue by adding checking accounts and other more traditional products. However, the recommendation of the article is to embrace the online channel and open accounts for customers outside of a more constrained geographical footprint. In my opinion this has the potential to materially impact the risk presented to the financial institution.
It made me think about a couple of data points from my research. Namely that accounts opened online are 5x riskier than accounts opened through more traditional channels and that check fraud topped $1 billion dollars in 2008. The online channel represents a huge opportunity, but blindly chasing the revenue opportunity without regard to how an FI will manage the resulting risk can end badly. If the opinions of the risk managers at your institution haven’t been considered when evaluating strategic decisions such as pursuing online growth, it’s time to make room at the table and embrace them.
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Ironic that, in fleeing risk, the companies ran smack dab into risks of another flavor. Vanilla, it turns out, can be just as problematic.
Really, however, this should be obvious. We know risk is everywhere, and thinking that the downside of “safe” products doesn’t need to be analyzed is just as silly as the widespread, 2007 belief that algorithms had made the downside of complex securities disappear.
There is no way to make risk disappear.
There is only a way for it to be managed.
And as we can see here from this map of bank failures since 2008, that’s a lesson many had to learn the hard way. If more attention isn’t paid to the risks of the financial world — both the complex and the “safe” — expect this Wall Street Journal list of failures to grow.
